Partnership Agreements

By drafting a partnership agreement, you can structure your relationship with your partners pretty much however you want. You and your partners can establish the shares of profits (or losses) each partner will receive, what the responsibilities of each partner will be, what should happen to the partnership if a partner leaves, and how a number of other issues will be handled. It is not legally necessary for a partnership to have a written agreement; the simple act of two or more people doing business together creates a partnership. But only with a clear written agreement will all partners be sure of the important—and sometimes touchy—details of their business arrangement.

In the absence of a partnership agreement, your state’s version of the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA) kicks in as a standard, bottom-line guide to the rights and responsibilities of each partner. Most states have adopted the UPA or RUPA in some form. In California, for example, if you don’t have a partnership agreement, then California’s RUPA states that each partner has an equal share in the business’s profits, losses, and management power. Similarly, unless you provide otherwise in a written agreement, a California partnership won’t be able to add a new partner without the unanimous consent of all partners. (Cal. Corp. Code §â��16401.)  In short, it’s important to understand that you can override many of the legal provisions contained in the UPA or RUPA if you and your partners have your own written agreement.

Since a partnership by definition has more than one owner, you'll need to address the issue of potential changes in ownership. You'll want to establish rules for what will happen if an owner retires, becomes disabled, dies, gets divorced, or otherwise faces a situation that brings business ownership into question. Buy-sell provisions address these issues and can exist in a separate document or may be included in your partnership agreement.  

What a Partnership Agreement Can’t Do

Although a general partnership agreement is an incredibly flexible tool for defining the ownership interests, work responsibilities, and other rights of partners, there are some things it can’t do. These include:

•   freeing the partners from personal liability for business debts

•   restricting any partner’s right to inspect the business books and records

•   affecting the rights of third parties in relation to the partnership—for example, a partnership agreement that says a partner has no right to sign contracts won’t affect the rights of an outsider who signs a contract with that partner, and

•   eliminating or weakening the duty of trust (the fiduciary duty) each partner owes to the other partners.

What to Include in Your Agreement

There’s nothing terribly complex about drafting partnership agreements. They’re usually only a few pages long and cover basic issues that you’ve probably thought over to some degree already. Partnership agreements typically include at least the following information:

•   name of partnership and partnership business

•   date of partnership creation

•   purpose of partnership

•   contributions (cash, property, and work) of each partner to the partnership

•   each partner’s share of profits and losses

•   provisions for taking profits out of the company (often called partners’ draws)

•   each partner’s management power and duties

•   how the partnership will handle departure of a partner, including buy-out terms

•   provisions for adding or expelling a partner, and

•   dispute resolution procedures.

These and any other terms you include in a partnership agreement can be dealt with in more or less detail. Some partnership agreements cover each topic with a sentence or two; others spend up to a few pages on each provision. Of course, you need an agreement that’s appropriate for the size and formality of your business, but it’s not a good idea to skimp on your partnership agreement.

For more on partnerships, including  an excellent step-by-step guide to putting together a solid, comprehensive partnership agreement, see Form a Partnership: The Complete Legal Guide, by Ralph Warner and Denis Clifford (Nolo).  Also, Business Buyout Agreements: A Step-by-Step Guide for Co-Owners, by Anthony Mancuso and Bethany Laurence (Nolo), explains how to draft terms that will enable you to deal with business ownership transitions. There are more detailed partnership agreement forms (as well as many other resources for running your small business) in Quicken Legal Business Pro (Nolo). You can learn more about these resources at www.nolo.com.  

Excerpted from The Small Business Start-Up Kit,  by Peri Pakroo (Nolo).  

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